MANAGEMENT DISCUSSION AND ANALYSIS
NET SALES ANALYSIS (CONSOLIDATED):
Total operating income of Piramal Enterprises Limited (PEL) grew by 27.5% to Rs.4,520.2 crores in FY2014 as against Rs. 3,544.3 crores in FY2013, with growth coming fromacross each business line. PELs Pharma Solutions business grew by 14.2% to Rs.1,786.0 crores as against Rs. 1,563.7 crores in FY2013. Revenue from the Critical Carebusiness grew by 16.9% to Rs. 720.4 crores as compared with Rs. 616.1 crores in FY2013.Sales from the OTC and Ophthalmology segment were at Rs. 328.2 crores as compared with Rs.271.2 crores in FY2013, registering growth of 21.0% for the year. Income from thefinancial services businesses, including investment income, grew by 91.3% to Rs. 743.7crores this year as against Rs. 388.8 crores for FY2013. Revenue from the informationmanagement business grew by 38.1% to Rs. 899.3 crores this year as against Rs. 651.3crores in FY2013.
The break-up of total operating income is as under:
| || || || ||Rs. in Crores |
|No. ||Total Operating Income Break-up ||% Sales ||Year ended ||Growth |
| || || ||31st March 2014 ||31st March 2013 || |
|1 ||Pharmaceutical Businesses || || || || |
|A ||Pharma Solutions ||39.5% ||1,786.0 ||1,563.7 ||14.2% |
|B ||Critical Care ||15.9% ||720.4 ||616.1 ||16.9% |
|C ||OTC and Ophthalmology ||7.3% ||328.2 ||271.2 ||21.0% |
|D ||Others ||0.9% ||42.6 ||53.2 ||-19.9% |
|2 ||Financial Services businesses (Incl. Investment Income) ||16.5% ||743.7 ||388.8 ||91.3% |
|3 ||Information Management ||19.9% ||899.3 ||651.3 ||38.1% |
| ||Total ||100% ||4,520.2 ||3,544.3 ||27.5% |
FINANCIAL HIGHLIGHTS (CONSOLIDATED)
| || || ||Rs. in Crores |
|Particulars ||FY2014 ||FY2013 ||Growth |
|Total Operating Income ||4,520.2 ||3,544.3 ||27.5% |
|EBITDA ||860.3 ||611.0 ||40.8% |
|EBITDA as a % of Total Operating Income ||19.0% ||17.2% ||- |
|Finance Costs ||1,049.6 ||575.0 ||82.5% |
|Depreciation ||246.9 ||209.6 ||17.8% |
|Exceptional Items ||(1.4) ||19.1 ||- |
|Profit / (Loss) Before Tax ||(434.8) ||(192.7) ||- |
|Tax ||62.8 ||24.8 ||153.4% |
|Profit / (Loss) after Minority Interest and Share in Profit / Loss of Associates ||(501.4) ||(227.3) ||- |
|Earnings Per Share (Rs.) (Face value Rs. 2/-) ||(29.1) ||(13.2) ||- |
Total Operating Income
As given in the table earlier, during FY2014, each of the business segments have growncontributing to the overall growth of 27.5% in the total operating income of the Company.
Earnings before Interest, Depreciation and Tax (EBITDA)
EBITDA for the year grew by 40.8% to Rs. 860.3 crores as against Rs. 611.0 crores inFY2013. The margins as a percentage of total income were higher at 19.0% as compared with17.2% for FY2013. Growth in EBITDA for FY2014 was driven by higher revenues.
Finance costs for the year were higher by 82.5% at Rs. 1,049.6 crores as compared withRs. 575.0 crores in FY2013 on account of funds raised to expand the financial servicesbusinesses. Finance costs for FY2014 also include one-time charges of Rs. 178 crores,mainly on account of discounting of Abbott receivables for investing in lendingoperations.
Depreciation for FY2014 was higher at Rs. 246.9 crores as compared with Rs. 209.6crores in FY2013 on account of increase in fixed assets of Pharma Solutions business,Critical Care business and DRG.
Increase in tax expenses from Rs. 24.8 crores in FY2013 to Rs. 62.8 crores in FY2014was mainly on account of taxes paid on income of subsidiaries.
Profit / Loss after Minority Interest and Share in Profit / Loss of Associates andEarning Per Share (EPS)
Loss after Minority Interest and share in profit / loss of associates for the year wasRs. 501.4 crores as against a loss of Rs. 227.3 crores in FY2013. The increase in thisloss was on account of higher finance costs in FY2014. EPS for the year was at Rs. (29.1)per share.
| || ||Rs. in Crores |
|Particulars ||As at 31st March, 2014 ||As at 31st March, 2013 |
|Liabilities || || |
|Share Capital ||34.5 ||34.5 |
|Reserves and Surplus ||9,286.6 ||10,689.1 |
|Minority Interest ||- ||11.8 |
|Loan Funds ||9,551.9 ||7,688.1 |
|Deferred Tax Liability / (Asset) || |
|Total Liabilities || |
|Assets || || |
|Net Fixed Assets ||6,682.1 ||6,081.4 |
|Investments ||9,445.8 ||7,876.8 |
|Net W orking Capital ||2,704.2 ||4,419.3 |
|Total Assets ||18,832.1 ||18,377.5 |
Total Debt as on March 31, 2014 was Rs. 9,551.9 crores, compared to Rs. 7,688.1 croresas on March 31, 2013. Debt / Equity ratio was 1.02 as on March 31, 2014, compared to 0.72as on March 31, 2013. Debt increased during the year mainly on account of loans taken forexpanding the financial services businesses.
During the year, PELs gross fixed assets increased by Rs. 269.2 crores, mainly onaccount of increase in capital assets in businesses like Pharma Solutions, Critical Careand information management, apart from acquisitions and capital expenditure related toR&D activity.
Book Value of Investments as on March 31, 2014 was higher at Rs. 9,445.8 crores,compared to Rs. 7,876.8 Crores as on March 31, 2013. The increase was mainly on account ofinvestment in shares of Shriram Transport Finance Company Limited. Investments as on March31, 2014 include an investment of Rs. 5,864.4 crores in shares of Vodafone India whichwere sold in May 2014.
Net Working Capital (Consolidated)
| || ||Rs. in Crores |
|Particulars ||As at 31st March, 2014 ||As at 31st March, 2013 |
|Raw / Packing Material ||249.91 ||182.31 |
|No. of days ||31 ||26 |
|Finished Goods ||155.93 ||188.59 |
|No. of days ||20 ||27 |
|Receivables ||724.64 ||595.6 |
|No. of days ||70 ||67 |
|Net Working Capital ||(112.5) ||485.8 |
|No. of days ||-11 ||55 |
The net working capital as on March 31, 2014 is negative on account of provision ofdividend for FY2014 being higher at Rs. 1,059.9 crores as against Rs. 353.3 crores inFY2013.
1. Sales for the purpose of calculating no. of days in theabove table is gross sales (i.e. net sales + excise duty) and includes other operatingincome but does not include income from financial services. Revenue from informationmanagement business is included for the purpose of calculating days in receivables but notin case of inventory.
2. Receivables do not include the outstanding amount receivable from Abbott pursuant tothe sale of domestic formulations business and receivables pertaining to financialservices.
3. Other current liabilities do not include current maturities of long term debt andunamortised deferred premium.
The market for global outsourcing is expected to grow to US$ 63 billion by 2017 (Source:Scrip Insights 2012). The global outsourcing trend is likely to continue, driven bythe rising healthcare costs in developed countries and reducing profitability ofpharmaceutical companies due to patent expiry of various blockbuster drugs. Long termprospects for the industry are backed by cost pressures for innovative companies andincreasing genericisation. On the other hand, regulatory compliance and quality assurancerequirements are of a higher standard given the stringent inspections and audits of theU.S. Food and Drug Administration (FDA) over the past few years. Established relationshipsand trust with innovators, quality infrastructure, good regulatory track record and lowproduction and R&D costs should place PEL in a good position to take advantage of thistrend.
All the manufacturing sites of Pharma Solutions continue to successfully clearregulatory audits conducted by various agencies.
During the year, Pithampur, Digwal and Grangemouth facilities were audited by the U.S.FDA. UNICEFs GMP audit was completed at Mahad site with no major or criticalobservations.
PELs revenues from Pharma Solutions business grew by 14.2% to Rs. 1,786.0 croresin FY2014 as compared with Rs. 1,563.7 crores in FY2013. This year saw a healthy flow ofclinical stage Active Pharmaceutical Ingredient (API) development projects and a robuststream of enquiries for Antibody Drug Conjugates (ADCs) at Grangemouth site. Revenue fromformulations manufacturing was impacted due to reduced volumes from a key product affectedby generic competition faced by the customer.
This year Pharma Solutions was judged as one of the best contract manufacturingorganisations by Life Science Leaders pharmaceutical and biopharmaceuticalsubscribers and has won an award for Quality and Reliability. Digwalsite has been awarded the Five Star Safety Award by the British Safety Council& is now eligible to apply for the Sword of Honour Award that recognizesthe best of the best in the fields of Health and Safety Management.
Revenue from Critical Care business was Rs. 720.4 crores in the current year ascompared with Rs. 616.1 crores in FY2013, registering a growth of 16.9%. Increased shareof Sevoflurane in the US and some other emerging markets have contributed to the growth inrevenues. Today, PELs market share in terms of volume for Sevoflurane is more than30% in the US. New Sevoflurane contracts were won following the registrations and launchesdone in FY2014 in several new markets, including Europe and Japan. Isoflurane sales thisyear were also higher on account of improved realization from the veterinary productbusiness. The business is now focused on increasing share of Sevoflurane market andlaunching Desflurane.
OTC and Ophthalmology
The OTC and Ophthalmology businesses grew at above market growth rate despite difficultmarket conditions. Sales grew by 21.0% to Rs. 328.2 crores in FY2014 as compared with Rs.271.2 crores in FY2013 through organic and inorganic initiatives. Products and brandslaunched through FY2013 are now showing traction. In October this year, the acquisition ofan anti-pruritic brand, Caladryl from Valeant Pharmaceuticals InternationalInc. was completed. Recently, an exclusive sales & distribution agreement for theIndian market was signed with Merisant for its artificial sweetner, Equal. OTCbusinesss marketing campaign for Saridon received recognition this year forinnovation in branding.
Allergan India Limited (AIL) is a 51:49 Joint Venture for ophthalmic products betweenAllergan Pharmaceuticals (Ireland) Ltd. Inc. and PEL. Total revenues of AIL were Rs. 242.1crores (FY2013 Total Revenue: Rs. 205.5 crores).
PEL is working towards discovering and optimizing compounds to meet important unmetmedical needs. The Life Sciences vertical has three main focus areas - Imaging, NCEResearch and Bio-orthopaedics.
NeuraceqTM (florbetaben F18) received approval and marketing authorizationfrom the U.S. FDA in March 2014 and from the European Commission in February 2014. Thisimaging agent, which detects beta-Amyloid plaque deposition in the brain, can now bemarketed in the U.S. and in all countries of the European Economic Area (EEA). The team isnow focused on medical launch in the US, commercial launch in Europe, and reimbursement.
PELs NCE Research division is focused on developing medicines that matter topatients, particularly in the areas of oncology and metabolic disorders. In May 2013, anInvestigational New Drug (IND) for the GPR40 agonist - P11187, an oral anti-diabeticmolecule, was approved by the U.S. FDA for commencement of Phase I trials in healthyvolunteers in the US. Similarly, phase I trials in US commenced for the DGAT1 inhibitor,P7435, which has the potential to address multiple aspects of metabolic syndrome,including dyslipidemia and diabetes. The active Phase I trials in Oncology for P1446 andP7170 continue to make progress. In addition, PEL runs a number of active discoveryprograms in both areas. The R&D facility located in Mumbai received OECD GLPcertification in March 2014. This enables PEL to conduct important IND enabling studiesin-house with a shorter turnaround time and reduced cost, and importantly, providesexternal validation of the quality of research done.
PELs bio-orthopaedics division is focused on the commercialization of BST-CarGel,which is an EU class III medical device. BST-Cargel is an advancedbio-scaffold technology that enhances cartilage regeneration. Enabled by the Europeanregulatory approval received in FY2013, BST-CarGel was commercially launchedin a number of countries in Europe, with an initial focus on the private market. The teamhas also started the process of obtaining reimbursement in key European markets, whichcould facilitate widespread adoption.
Financial Services Businesses
PELs financial services business includes Piramal Fund Management Private Limited(PFMPL) and the Structured Investments Group (SIG). PFMPL provides comprehensive financingoptions to real estate developers, while SIG targets structured finance transactions forinfrastructure companies. Income from this vertical including investment income grew by91.3% to Rs. 743.7 crores this year as against Rs. 388.8 crores in FY2013.
Recently, the real estate private equity fund management business and the real estateand allied sector focused NBFC were combined into an integrated vertical, PFMPL. Assetsunder management as on March 31, 2014 were at Rs. 6,585 crores as against Rs. 4,257 croresas on March 31, 2013. This year, PFMPL raised a total of Rs. 1,500 crores through DomesticFund V and the Mumbai Redevelopment Fund. In early 2014, CPPIB Credit Investments Inc., awholly-owned subsidiary of Canada Pension Plan Investment Board (CPPIB) partnered withPFMPL in a strategic alliance for providing rupee debt financing. The initial commitmentby both parties is of $ 250 million each for investing in urban real estate projects.Another strategic partnership was entered into with India Infoline Limited (IIFL) forinvestment advisory services. The first IIFL vehicle advised by PFMPL - IIFL
Income Opportunities Fund Series Special Situations, was closed at Rs. 750crores as on March 31, 2014. Apart from this, the loan book of the real estate and alliedsector focused NBFC stood at Rs. 1,936 crores as on March 31, 2014 as compared with Rs.1,591 crores as on March 31, 2013.
During FY2014, SIG invested Rs. 500 crores in Optionally Convertible Debentures ofGreen Infra Ltd. The total investment made by SIG till date is Rs. 925 crores. The groupis exploring opportunities to invest in assets that are a combination of cash generatingprojects as well as under execution projects.
In order to further strengthen presence in the financial services industry, a long termassociation with the Shriram Group was entered into with the acquisition of equity stakein the listed NBFC of the Group, Shriram Transport Finance Company Limited (STFC) in May2013. PEL invested Rs. 1,636 crores for ~10% stake in STFC, one of Indias leadingplayers in commercial vehicle finance with a niche presence in financing pre-owned trucksand small truck owners. In April 2014, PEL invested Rs. 2,014 crores for an ef 20% stakein Shriram Capital Limited (SCL). SCL is the overarching holding company for the financialservices fective and insurance entities of the Shriram Group. In June 2014, PEL alsoacquired ~10% equity stake in Shriram City Union Finance Limited, the retail focused NBFCof the Shriram Group, for Rs. 790 crores.
Information Management Business
PELs information management business, Decision Resources Group (DRG) is a premierprovider of data analytics services to its pharmaceutical, medical device, managed careand other healthcare industry clients. DRG has a global presence with offices in Belgium,Canada, England, Japan and various locations across the U.S. DRGs customer baseincludes 48 of the top 50 pharmaceutical companies and continues to achieve a highcustomer retention rate.
The business revenues grew by 38.1% to Rs. 899.3 crores in FY2014 over Rs. 651.3 croresin FY2013. Since the DRG acquisition was completed on June 6, 2012, the FY2013 revenuesrepresent a period of approximately ten months only. DRG had also acquired AbacusInternational, UK in December 2012, which has been fully integrated during FY2014. DRGalso acquired Relay Technologies Management, a life sciences industry focused dataanalytics company in January 2014.
HUMAN RESOURCES (HR)
Last year, PELs HR function worked on initiatives that were aligned with theneeds of the businesses with strong emphasis on integrating PELs core values of Knowledge,Action and Care with every HR process. The HR Team was instrumental incommunicating and cascading the values to each and every employee in the Company throughvarious interventions devised.
Values Cascade activities were conducted across various sites, with the objective ofcommunicating the core values and their revelance to the employees. Almost 100 percent ofthe emploees were engaged through these activities and they continue to imbibe thesevalues as a way of life. To recognise the efforts of various teams that worked on thecascade process, Values Cascade awards were given to 11 teams across India andinternational locations during the Annual Communication Meet held in May 2014.
PEL has invested in developing the HR function to support the long term growth throughmultiple initiatives as under:
During FY2014, total manpower of PEL on a consolidated basis increased by 637 people to4,984 from 4,347 in FY2013, details of which are as under:
|Function ||31.03.2014 ||31.03.2013 ||Change |
|Field ||552 ||537 ||15 |
|R&D ||903 ||827 ||76 |
|Others ||2,781 ||2,428 ||353 |
|Pharmaceuticals Total (A) ||4,236 ||3,792 ||444 |
|Financial Services (B) ||99 ||40 ||59 |
|Information Management (C) ||649 ||515 ||134 |
|Grand Total (A+B+C) ||4,984 ||4,347 ||637 |
Learning and Development:
PELs values of Knowledge, Action and Care include the need for itsemployees to constantly build expertise and domain knowledge, thereby, creating value forthemselves and for the Company. To enable this, the Company has created structuredlearning opportunities through the Learning University, which is an in-houseuniversity, catering to the learning and growth needs of the employees. The LearningUniversity Calendar of Programs was a result of collated needs from PELsvarious businesses. Under these programs, over 3,500 employees benefitted throughenhancement of technical, behavioral and leadership skills. Stakeholders and participantsfound these programs to be highly relevant and impactful. The Learning Fridayseries brought in several speakers on subjects ranging from personal finance planning tohealth and wellbeing. Around 500 employees were covered under this series through 15different programs offered across locations.
Performance Management system:
In line with the value of Action, the focus in the area ofPerformance Management was to bring in standardization, process clarity andexecution excellence. This was achieved through workshops across businesses focusing onthe need for coaching people for high performance and aligning goals with the overallbusiness objectives.
Employee engagement has helped organizations, teams and individuals perform better andis considered as an important metric of business success globally. An anonymous employeeengagement initiative called Bandhan has been conducted by PEL over the lastseven years with an aim to enrich the working environment and to build a strong culture ofengagement. As an extension of the value of Care, PEL also focused onsustained engagement through action planning workshops conducted across PELsbusinesses.
Service Effectiveness Teams:
In a move to improve the operational efficiency of the HR processes, the SixSigma approach was introduced for all HR teams across various sites and businessesin India by forming Service Effectiveness Teams. The mandate before the teams was tostandardize all operational HR activities, track deliverables and improve metrics forbetter alignment with the business. The journey towards being a Six Sigmafunction will be of six years; three teams have crossed Level 1 in this financial year.
PEL has emerged as a global conglomerate with operations in India, UK, USA, Canada,Germany, Italy, etc. With increasing global operations and diversified businesses,PELs risk management process has undergone a significant change. Risk management isa systematic process of identifying, analysing and responding to risk events that have thepotential to generate adverse effect on the achievement of organizational objectives.Risks are classified into various categories for better management and control. Each riskcategory is assigned an owner and appropriately defined for the purpose of commonunderstanding. Also, the possibility of occurrence of the risk event (likelihood) and themagnitude of their consequences (impact) on the organization is determined and used toprioritise risk management. Detailed mitigation plans are worked out and effectiveness ofthe same is assessed periodically.
PEL has constituted an independent risk management group to evaluate risk acrossvarious business groups. The risk management group has put in place a systematic way ofidentifying, quantifying and managing risks across the group to aid the strategic decisionmaking process. Following are the major risks perceived by PEL along with the measurestaken to mitigate the same:
Risk related to Drug Discovery and Commercialization:
There are significant investments made for specializing in discovery and development ofnovel small molecule drugs to meet important unmet medical needs. PEL is exposed to risksarising out of the extremely challenging probability of success rate of drug discovery andcommercialization.
Client and Product Concentration Risk:
Most of PELs businesses are based on contracts with customers. Significantbusiness is transacted with a few major customers. As a result, any set back atcustomers end may adversely affect PELs revenues. Similarly, a few productsgenerate significant portion of the revenue. A drop in demand for these products mayadversely affect the Companys revenues. The business development teams are activelyseeking to diversify the client base to mitigate concentration risk.
Product and Quality Risk:
PEL is expected to maintain global quality standards in manufacturing. Some ofPELs products are directly consumed / applied by the consumers. Any deviation withregards to quality compliance of products would impact the consumers worldwide and hence,adversely affect the Companys performance. There is a dedicated corporate qualityassurance group which actively monitors the adherence to prescribed quality standards.
Default and Concentration Risk in Financial Services Businesses:
In the financial services businesses, the risk of default and non-payment by borrowersmay adversely affect profitability and asset quality. Also, concentration in the realestate sector may pose a risk to PEL. The risk is being partly mitigated by setting up aconcentration limits framework which incentivizes business units to diversify portfolioacross counterparties, sectors and geographies.
Adverse Fluctuations in Foreign Exchange Risk:
PEL has significant revenues in foreign currencies through export of products andoperations outside India. PEL is exposed to risk arising out of changes in foreignexchange rates. The centralized treasury function aggregates the foreign exchange exposureand takes prudent measures to hedge the exposure based on prevalent macro-economicconditions.
Interest Rate Risk:
Volatility in interest rates in PELs lending and treasury operations could causethe net interest income to decline and adversely affect profitability of the financialservices business. The centralized treasury function takes prudent measures to hedge theinterest rate risk based on prevalent macro-economic conditions.
PEL requires certain statutory and regulatory approvals for conducting businesses andfailure to obtain, retain or renew them in a timely manner, may adversely affectoperations. A change in laws or regulations made by the government or a regulatory bodycan increase the costs of operating a business, reduce the attractiveness of investmentand / or change the competitive landscape. Also, PEL is structured through varioussubsidiaries in various countries in a tax efficient manner. Changes in regulations interms of repatriation and funding may lead to adverse financial impacts.
PEL has equity investment in companies in India. Like any other equity investment, thisis subject to market conditions.
Certain statements included above may be forward looking and would involve a number ofrisks, uncertainties and other factors that could cause actual results to differmaterially from those suggested by the forward looking statements.